The forex market is so competitive that thinking about it can sometimes be an overwhelming task, especially if you are just a beginner. Like other kinds of trading in the financial markets, trading in forex can seem intimidating and complex for beginners. But the core activity involved in trading currencies is quite simple.
In the past, forex trading was dominated by a few large market operators. Thankfully, with many available resources, anyone can now access this market. That said, this article will explain a couple of important things you need to know before you start forex trading.
The forex market is volatile
The forex market is considered to be very volatile, meaning there can be sudden movements that can affect your account. Therefore, you must always watch out for these unexpected movements to prevent your account from being wiped out within a few minutes.
These sudden movements can be caused by economic events like removing the ceiling on the major currency to let the currency rate float. Situations like these can sometimes catch you off guard if you’re not expecting such moves.
So if you are on the wrong side of the forex trade, you can lose your money but you can also make lots of money if you’re on the right side. As you can see, it’s important to understand the volatility of the forex market by managing the risks, such as using a stop loss.
Forex market is also more accessible than most of the other online trading markets, making it one of the best markets to trade. Even though it’s volatile, you can still catch most of the market moves. Aside from this, it’s affordable to start trading compared to many of the other financial markets because it only demands a low trading capital requirement.
Although accessibility doesn’t determine the quality of the market, it makes sense for inexperienced traders to have a feel of forex trading. This is because some brokers offer a free demo trading account that you can use to understand forex trading.
Forex trading can be tricky for investors, especially new investors due to their lack of experience or knowledge of the market. Therefore, a demo trading account can be useful for you to educate yourself about market and investment basics before you decide to enter the market. It’s only through this that you can develop good trading strategies before you start the actual trade with your real money.
The right amount of leverage
Leverage can allow you to have greater positions in the currency pair than the real amount that is in your account. Most forex brokers provide leverage to their customers to allow you to keep the margin amount aside depending on your preferred leverage.
In this way, you can do larger trade on the currency pair without using your own money. Best Etoro Review UK has discussed the right amount of leverage that is best for you.
The amount of leverage can vary from broker to broker depending on the regulations and the currency pair that you’re trading in. Some brokers can offer 1:500 leverage on the major currency pairs. So what doesn’t this mean to you?
Using very high leverage can give you quick profits while using little capital. However, it can also backfire because it can lead to significant losses. For this reason, various regulators put a cap on leverages to protect traders. The best way is to use low leverage on each trade you make to minimize the risks.
A regulated broker
It’s crucial to choose a reputable and regulated forex broker for your CFDs and forex trade. This is the only way you can be assured of the safety and protection of your money. Best of all, the regulation makes sure that the broker maintains the proper trading environment and conditions for their clients. Some of the conditions include leverage caps, proper practices, and direct market access.
The problem with unregulated brokers is that they don’t have an obligation or oversight to maintain the right trading conditions for their customers. As a result, you can likely experience some funds withdrawal problems or even failure to send orders to the market.
Hence, it’s important to go for a broker based on their online reviews and regulation. The rule of the thumb is that the more regulations the broker has, the best trading conditions you will have as a client.
Volume and liquidity
Another important factor you need to consider is the trading volume and liquidity. Many people prefer the forex market because it’s highly liquid and it involves global traders, such as corporations, governments, institutional investors, and banks.
All these participants meet in one place to create a huge demand and liquidity. Remember that this liquidity makes it possible for your order to be processed quickly when it’s placed, regardless of whether you’re selling or buying the currency pair.
Think about this, if there is less liquidity in the market, any sudden influx of capital or small events can likely move the currency pair. The same applies to cryptos and some of the exotic currency pairs where there are low demand and volume. Therefore, sudden movements in these pairs happen when there is an increase in capital or a sudden increase in demand.
Software advancements have made it possible to trade online with ease. Therefore, it’s not surprising to see various forex trading platforms being launched every year. The forex software industry has also many third-party software providers who offer several add-ons and plugins on CFS and forex trading platforms. This is the reason why forex trading is perhaps one of the most lucrative markets that you can ever trade on.
On top of this, you are also allowed to trade on a margin, meaning you can use leverage. In this way, you stand a better chance of trading with bigger amounts than the money you deposit into your account. This can be an advantage or disadvantage because your potential gain can be bigger than your deposit. But any potential loss can also equally be larger than your deposit.
If you decide to trade, make sure that you use a broker that allows you to deposit and withdraw funds hassle-free. There is no reason any reliable broker can hold on to your withdrawals because their job is to facilitate trading. Hence, use a broker known for their speedy and smooth withdrawal process.